Gold Erases Year’s Gain as Europe Concern Boosts Dollar

Gold gained as much as 14 percent in New York this year. Photographer: Victor J. Blue/ Bloomberg

May 14 (Bloomberg) -- Gold erased its gains for this year
as concern that Europe’s debt crisis is deepening strengthened
the dollar and cut gold’s appeal as an alternative asset. Other
precious metals also declined.

The dollar climbed to a three-month high versus the euro as
a leadership vacuum in Greece prompted European officials to
weigh prospects for the currency union’s first-ever departure of
a member state.

“Worries about Europe are pushing people to the dollar,”
Frank McGhee, the head dealer at Integrated Brokerage Services
LLC in Chicago, said in a telephone interview. “Gold will
continue to grind down.”

Gold futures for June delivery declined 1.5 percent to
settle at $1,561 an ounce at 1:40 p.m. on the Comex in New York.
Earlier, prices touched $1,555, the lowest since Dec. 30. The
metal ended 2011 up 10 percent at $1,566.80.

Prices may slump to $1,520 within the next few trading
sessions, McGhee said.

Bullion for immediate delivery dropped as much as 1.4
percent to $1,556.52. It ended 2011 at $1,563.70.

The metal rose as much as 14 percent in New York this year
after it advanced for 11 consecutive years. While prices dropped
from the record $1,923.70 set in September, central banks are
expanding reserves of the metal and holdings in exchange-traded
products at 2,383.4 metric tons are about 1.1 percent below the
March 13 all-time high, data compiled by Bloomberg show.

Comparative Performance

Before today, the Standard & Poor’s GSCI gauge of 24
commodities retreated 0.4 percent this year, and the MSCI All-Country World Index of equities climbed 5.2 percent. Treasuries
returned 0.7 percent, a Bank of America Corp. index shows. The
dollar was 0.1 percent stronger versus six major currencies this
year through May 11.

Greek President Karolos Papoulias prepared for another day
of discussions with political party leaders on forming a
national unity government. Greece may face a further election
unless leaders can agree on a new coalition. The standoff has
reignited concern that the country will renege on pledges to cut
spending under the two bailouts negotiated since May 2010, and,
ultimately, leave the euro area.

“The predominant fear is that the Greek issue will morph
into something bigger and we may see troubles erupting in
countries like Italy,” Bart Melek, the head of commodity
strategy at TD Securities Inc. in Toronto, said in a telephone
interview.

Interest Rates

Gold had rallied amid record-low interest rates from Europe
to the U.S. Bullion generally earns investors returns only
through price gains. Fed policy makers said on April 25 they
expect growth to gradually accelerate, while refraining from new
actions to lower borrowing costs. The central bank has pledged
rates at “exceptionally low levels” at least through late
2014.

Gold has been trading below its 200-day moving average
since the end of March, a sign to some who study charts of
trading patterns to predict trends that the rout has further to
go. Hedge funds and money managers held a net-long position of
92,498 futures and options in the week ended May 8, Commodity
Futures Trading Commission data show. The bet on higher prices
is at the lowest level since December 2008.

ETP investors are more bullish. While the pace of inflows
has slowed each year since 2009, they’re holding more of the
metal than all but four central banks. The banks added 439.7
tons last year, the most in almost five decades, and may buy a
similar amount in 2012, according to the London-based World Gold
Council.

Long-Term Outlook

“Absolutely nothing has changed regarding gold’s long-term
outlook,” said Mark O’Byrne, the executive director of Dublin-based GoldCore Ltd., a brokerage that sells and stores
everything from quarter-ounce British Sovereigns to 400-ounce
bars. “The notion that Europe is fixed is simply nonsense. You
need to see a sustained period of rising interest rates before
it’s bearish for gold and that’s a long way off.”

Silver futures for July delivery tumbled 1.9 percent to
$28.353 an ounce on the Comex.

On the New York Mercantile Exchange, palladium futures for
June delivery fell 1.4 percent to $594.85 an ounce, extending
this year’s loss to 9.3 percent. Platinum futures for July
delivery dropped 2 percent to $1,442.60 an ounce, after touching
$1,442.10, the lowest since Jan. 10.